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					    California Mortgage

1-4 Family Regulatory Review
Financial Reform
The Bad and the Ugly
 Federal Reserve
 Effective April 1, 2011
Amends Truth-in-Lending
• Rulemaking authority

• Proposed vs. Final

• Possibilities of change - None
        Major Changes
•   New definitions
•   New compensation requirements
•   New disclosure requirements
•   New “Safe Harbor”
•   Examples
       Biggest Definition
• “Originator” now defined to include
  mortgage broker company
• New rule changes cover every closed
  end mortgage residential mortgage
  (SFR 1-4) loan except timeshares.
• This includes investment properties (no
  business purpose exclusion)
            Prohibited Payments
   In connection with a consumer credit
   transaction secured by a dwelling, no
   loan originator shall receive, and no
   person shall pay a loan originator, directly
   or indirectly, compensation in any
   amount that is based on any of the
   transaction‟s terms or conditions.*
*Later goes on to say that loan amount is not deemed a transaction
   term or condition provided it is based on a fixed percentage
       “Compensation” Defined
• Salaries
• Commissions
• Bonuses
• Awards
• Prizes
• Trips
• Processing fees – even if he/she
  processes the loan
• Anything!
• Borrower One has an 800 credit score
  and Borrower Two has a 495 credit
  score. Both must be charged the same
  amount in fees. Rates may be
      RESPA vs. TILA
• Fed Rule and compensation structure
  lead to RESPA violations
       Prohibition on Steering
• No steering toward a loan that pays
  the originator more money
• This provision leads originators to use
  the safe harbor
      Safe Harbor Criteria
• Lowest rate
• Lowest rate without any negative
• Lowest fee
    Dodd-Frank Bill
Wall Street Reform and Consumer
      Protection Act of 2010
• In 2004 FNMA and FHLMC purchased
  $175,000,000,000 in subprime
  mortgage securities, which was 44% of
  the market
• Between 2005 and 2007 they
  purchased $1,000,000,000,000 in
  subprime and Alt-A
• Title X – Bureau of Consumer Financial Protection
   – New Bureau
   – Law amendments

• Title XIV – Mortgage reform and anti-predatory lending
The Bureau

 “All consumer financial protection functions are

                   Bureau of
               Consumer Financial
      Bureau Basics
• Director appointed by President by
  and with the advice and consent of
  the Senate
• Director serves a 5 year term
• The Board of Governors of the Federal
  Reserve has no power over the Bureau
       Bureau Offices
• Office of research
• Office of fair lending and equal
• Office of financial education
• Office of Financial Protection for Older
           Bureau Functions
• Conducting financial education programs;
• Collecting, investigating, and responding to consumer
• Collecting, researching, monitoring, and publishing
  information relevant to the functioning of markets for
  consumer financial products and services to identify risks to
  consumers and the proper functioning of such markets;
• Subject to sections 1024 through 1026, supervising covered
  persons for compliance with Federal consumer financial law,
  and taking appropriate enforcement action to address
  violations of Federal consumer financial law;
• Issuing rules, orders, and guidance implementing Federal
  consumer financial law; and performing such support activities
  as may be necessary or useful to facilitate the other functions
  of the Bureau.
           Mortgage Laws
• The Alternative Mortgage Transaction Parity Act of 1982 (12
  U.S.C. 3801 et seq.)
• The Consumer Leasing Act of 1976 (15 U.S.C. 1667, et seq.)
• The Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.),
  except with respect to section 920 of that Act
• The Equal Credit Opportunity Act (15 U.S.C. 1691et seq.)
• The Fair Credit Billing Act (15 U.S.C. 1666 et seq.)
• The Fair Credit Reporting Act (15 U.S.C. 1681et seq.), except
  with respect to sections 615(e) and 628 of that Act (15 U.S.C.
  1681m(e), 1681w)
• The Home Owners Protection Act of 1998 (12 U.S.C.4901 et
•   The Fair Debt Collection Practices Act (15 U.S.C.1692 et seq.)
•   Subsections (b) through (f) of section 43 of the Federal Deposit Insurance
    Act (12 U.S.C. 1831t(c)–(f))
•   Sections 502 through 509 of the Gramm-Leach-Bliley Act (15 U.S.C. 6802–
    6809) except for section 505 as it applies to section 501(b)
•   The Home Mortgage Disclosure Act of 1975 (12 U.S.C. 2801 et seq.);
•   The Home Ownership and Equity Protection Act of 1994 (15 U.S.C. 1601
•   The Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2601 et seq.)
•   The S.A.F.E. Mortgage Licensing Act of 2008 (12 U.S.C. 5101 et seq.)
•   The Truth in Lending Act (15 U.S.C. 1601 et seq.)
•   The Truth in Savings Act (12 U.S.C. 4301 et seq.)
•   Section 626 of the Omnibus Appropriations Act,2009 (Public Law 111–8)
•   The Interstate Land Sales Full Disclosure Act (15U.S.C. 1701)
• Transfer is effective between 6 and 12
  months from date of enactment of act
  as agreed upon by the Bureau and
  the Agencies. Extension allowed up to
  18 months.
 Enacted     Transfer Date Announced      Transition
 7/21/10              9/20/10             Effective
          Interim Rules
Proposed Rules
   Any proposed rule of a transferor agency which that
   agency, in performing consumer financial protection
   functions transferred by this title, has proposed before
   the designated transfer date, but has not been
   published as a final rule before that date, shall be
   deemed to be a proposed rule of the Bureau.
Rules not yet effective
   Any interim or final rule of a transferor agency which that
   agency, in performing consumer financial protection
   functions transferred by this title, has published before
   the designated transfer date, but which has not
   become effective before that date, shall become
   effective as a rule of the Bureau according to its terms.
Law Amendments
• New combined Good Faith Estimate and
  Truth in Lending statement along with new
  HUD1 that includes final TIL
• New “Purchase Booklet” to explain the new
  GFETIL and purchase process updated
  every 5 years in “various languages and
  cultural styles”
• Insurance commissioners are given
  enforcement power over RESPA
      S.A.F.E. Act
• Bureau to develop registration system
  by 7/11
• Bureau may set minimum net worth,
  surety bond, and recovery fund
• Combine TIL with GFE
• FTC maintains enforcement authority
       HOEPA (Sec. 32)
• Specifically includes loan modifications
  in the sections relating to unfair or
  deceptive practices
       Minor but Cool (MBC)
• By 1/31/11 a study must be submitted by the
  Treasury on the state of Fannie and Freddie
• By 7/21/11 a study must be submitted by the
  Bureau on the difference in credit scores
  between those sold to creditors and those
  sold directly to consumers (Along with
  massive new requirements for CRA data
          Title XIV
Mortgage reform and anti-predatory
           lending act
• All regulations required by this section
  must be prescribed in final form within
  18 months of the transfer date and
  take effect with 12 months of final rule.
Truth in Lending Act
       Definition Changes
• Adds „mortgage originator‟ to
  – Includes person who provides mortgage
    financing on more than 3 properties in a
    year (Builders excluded)
  – Does not include modifiers, negotiators
    and servicers
       Duty of Care
• Each originator must be licensed or
• Unique identifier required on “All loan
• Compensation structure requirements
  similar to fed rule
• All liability goes to the mortgage
  originator. No creditor cushion
• Each mortgage originator is
  responsible for up to 3 times all direct
  and indirect compensation plus
  attorney fees upon violations
      Minimum Standards
• Ability to repay
• Borrowers with multiple homes must
  qualify for all payments
• Fully amortized qualification
• Mandatory full documentation
      Qualified Mortgage
• Full doc
• Not neg-am
• Most balloons prohibited
• Debt ratios established by the Board
  by rule
• Points and fees < 3 percent
         Other Fun Facts
• No more mandatory arbitration
• Where a prepayment penalty applies the borrower
  must also be offered a no penalty option
• Home-ownership counseling required on non-
  qualified mortgages for 1st time homebuyers
• New servicing disclosures on ARM‟s 6 months prior to
  adjustment including phone numbers for housing
  counselors and state regulators
• Brand new servicing disclosures for all loans
       New Appraisal
• Mandatory interior/exterior on high cost
• Mandatory second appraisal in short
  term flip transactions on high cost loans
  (paid for by originator)
• New high cost disclosures
• New $2,000 to the consumer in the case
  these requirements are violated
• New Appraisal independence standards
  due out 10/20/10
        Final Little Things…
•   Massive AMC changes
•   Sizeable ECOA changes
•   GAO to study HVCC for 12 months
•   HAMP changes and reporting
•   Fraud changes
             The SAFE Act

Primary Source: Phil Adleson, Adleson, Hess & Kelly
         The SAFE Act
• The Secure and Fair Enforcement for Mortgage
  Licensing Act of 2008
  – Passed on July 30, 2008
  – California‟s adoption of the SAFE Act was signed into law
    October 11, 2009
• Created a National Mortgage Licensing System and
  Registry (NMLS)
• Purpose: To enhance consumer protection in the
  origination of mortgages
  – Provide nationwide minimum educational and licensing
    standards for mortgage originators
  – Track mortgage originators across state lines
         Requirements of the
         SAFE Act
• Law requires Mortgage Loan Originators to
  – Pass two written qualified tests - national and state
  – Complete 20 hours of pre-licensure education courses
  – Submit fingerprints to the NMLS for clearance of an FBI
    background check
  – Authorize a credit report check, and pass state regulator‟s
  – Take eight hours of annual continuing education courses
    for license renewal
• Mortgage Loan Originator (MLO)
  – An individual who takes a residential
    mortgage loan application, or offers or
    negotiates terms of a residential
    mortgage loan for compensation or gain.
• Residential Mortgage Loan:
  – Any loan primarily for personal, family or
    household use that is secured by a
    mortgage, deed of trust, or other
    equivalent consensual security interest on
    a dwelling, or residential real estate upon
    which is constructed or intended to be
    constructed a dwelling
• Dwelling
  – A residential structure that contains one to
    four units, whether or not that structure is
    attached to real property.
  – The term includes an individual
    condominium unit, cooperative unit,
    mobile home or trailer if it is used as a
        DRE / DOC
• DRE licensees obtain an NMLS endorsement
  to their existing license
  – For existing licensees SAFE Act requirements must
    have been completed by September 15, 2010
• DOC originators obtain a license
  – For existing DOC mortgage originators SAFE Act
    requirements must have been completed by July
    15, 2010
          How to get started
• Login to NMLS
   – Create an individual account
   – Provide identifying information
• You will receive, via separate emails a User Name
  and Password
   – The MLO‟s NMLS „Unique Identifier‟ will be shown in the
     subject line of the emails
   – Login to the NMLS site and reset your password
          MU Forms
•   MU-1 Company Form
•   MU-2 Officers and Directors
•   MU-3 Branch locations
•   MU-4 Mortgage Loan Originators
•   System is difficult to navigate
•   Customer Service phone number is very helpful:
        Business Activities Report
• California‟s SAFE Act requires a Business
  Activities Report to be filed annually
  – Trigger for the report is different from the licensing
     • Where the broker “makes, arranges, or services one or
       more loans in a calendar year secured by real property
       containing one to four residential units.”
     • Nothing in this definition limits the reporting to
       Residential Mortgage Loans (i.e. consumer loans on SFR
       1-4 properties)
        Business Activities Report -
• Name and license number of the supervising
  broker and of all licensees under the
  broker‟s supervision
• List of real estate related activities in which
  the supervising broker and/or licensees are
• Activities relating to mortgages, including
  making, arranging or servicing
          Business Activities Report -
• Other activities performed under the real estate
  broker‟s license
• Activities performed under related licenses (CFL or
• A list of the media used by broker to advertise to
  the public
   – Note: all advertising to the public must include the MLO‟s
     NMLS unique identifier (as well as the DRE license number),
     including all point of contact materials such as business
     cards and stationary
          Business Activities Report -
• For Fixed-Rate loans made, brokered or serviced
  – Total number, aggregate principal amount, lowest interest
    rate, highest interest rate, and a list of institutional lenders
    of record (or categorize as privately funded)
  – Total number and aggregate principal amount of covered
    loans under 4970 (Cal 32)
  – Total number and aggregate principal amount of Non-
    Traditional Mortgage Loans (SB 385 loans; DRE form 885
         Business Activities Report -
• For Adjustable-Rate loans made, brokered or
  – Total number, aggregate principal amount, lowest
    beginning interest rate, highest beginning interest rate,
    highest margin, and a list of institutional lenders of record
    (or categorize as privately funded)
  – Total number and aggregate principal amount of covered
    loans under 4970 (Cal 32)
  – Total number and aggregate principal amount of Non-
    Traditional Mortgage Loans (SB 385; DRE form 885 used)
         Business Activities Report -
• For all loans made, brokered or serviced, the total
  number and aggregate principal amount of loans
   – Funded by institutional lenders
   – Funded by private lenders
   – That included a prepayment penalty
      • The minimum and maximum prepayment penalty lengths
      • The number of loans with prepayment penalties whose length
        exceeded the length of time before the loan payment
        amount could increase
         Business Activities Report -
• For all loans brokered, the total compensation
  received by the broker, including commissions and
  rebates (but excluding compensation used to pay
  third-party fees)
• For all loans made or brokered, the total number of
  loans for which an MLDS was provided in a
  language other than English, and the number of
  forms provided per language
• For all mortgage loans serviced, the total amount of
  funds advanced to be applied toward a payment
  to protect the security of the note being serviced
Risk-Based Pricing
       Risk-Based Pricing
• Final Rule published by the Federal
  Reserve Board on Jan. 15, 2010
• Rule is effective Jan. 1, 2011
• To notify consumers when lenders charge
  more for credit based on a consumer‟s
  credit report or score
• To inform consumers who might not
  adequately be informed of the effect their
  credit report or score has on pricing
• To allow consumers who have been
  financially affected by the information in
  their credit report to obtain a free copy
        The Rule Applies To
• Any company that uses a credit report or
  score in connection with a credit decision
• Consumer loans
• Credit extended to an individual primarily for
  personal, family or household purposes
  – Notice not required for business credit
  – Notice not required to be given to guarantors,
    co-signers, endorsers or sureties
        Risk-Based Pricing
• Creditor must provide a Risk-Based Pricing
  Notice if
  – Creditor uses a credit report or score in
    connection with a credit decision
  – Based on the credit report or score credit is
    provided to the consumer that is
     • On material terms
     • That are materially less favorable than the most
       favorable terms
     • Available to a substantial proportion of consumers from
       or through you
• Material Terms
  – Open-end Credit
    • APR, excluding any teaser rate, penalty rate,
      or fixed-rate HELOC option
  – Closed-end Credit
    • APR
• Materially Less Favorable
  – As a result of the terms imposed, the cost of
    credit will be “significantly greater” for the
  – Factors in determining “significance” include
    type of credit and term of credit
     • A difference in an APR may be more significant for a 30-
       year mortgage than for a 48-month auto loan
• Substantial Proportion
  – Not defined in the Rule
  – Must be more than a de minimus percentage,
    and may, or may not, represent a majority of
  – The purpose is to limit the notices to those
    consumers who are most affected by the “risk-
    based pricing”
  Who Provides the Notice?
• Who Must Provide          • Who Does Not
  the Notice                  Provide the Notice
  – Creditor to whom          – Assignees or
    the obligation is           purchasers
    initially payable         – Mortgage broker or
  – Even if the credit is       other broker or
    immediately                 arranger of credit
    assigned or sold          – Guarantors, co-
                                signers, endorsers or
      Choose a Compliance
• Risk-Based Pricing             • Credit Score Disclosure
  Notice                           Exception Notice
   – Provided to a specific         – Must be provided to all
     segment of consumers             consumers who apply for
     who apply for credit             credit
   – Creditor must determine        – Notice includes the
     who receives materially          consumer‟s credit score
     less favorable terms than        and its corresponding
     a substantial proportion         score distribution
     of consumers                   – Standard form letter, with
   – Standard form letter, no         credit score and score
     external data input              distribution input
       How to Determine Who
       Receives a Notice
• Direct Comparison Method
  – On a transaction basis, compare the
    consumer‟s APR with the best APR offered
    to a “substantial proportion” of consumers
    • What is the best APR offered to a substantial
      proportion of consumers?
    • Is the APR offered to the consumer in question
      less favorable than the best APR?
    • Is the APR offered materially less favorable?
       How to Determine Who
       Receives a Notice
• Credit Score Proxy Method
  – Provide a notice to every consumer who‟s
    credit score falls below the “cut-off score”
  – Cut-off Score
    • A hypothetical credit score which 40% of
      consumers are above and 60% are below
    • Creditor‟s Cut-off Score must be determined
      at least once every two years
       How to Determine Who
       Receives a Notice
• Tiered Pricing Method
  – May be used if you price credit by
    placing consumers in tiers
  – Creditors must provide the notice to all
    consumers who don‟t qualify for the top
         Risk-Based Pricing
• Statement that the terms offered are based on
  information from a consumer report
• Statement that the terms offered to the consumer
  may be less favorable than those offered to other
• Description of the type of information in credit
• Encourage consumers to verify accuracy of
  information in their credit report
         Risk-Based Pricing
• Provide name and contact information and toll-free
  number for each credit bureau used
• Notify consumer he/she can obtain a free credit
  report within 60 days, plus an explanation of how to
  obtain a free report
• Provide FTC and FRB websites for additional
  information about credit reports and consumer
• Model forms are considered a safe harbor
      Account Reviews
• You must provide a Risk-Based Pricing
  Notice if you use a credit report or
  score in connection with an account
  review and you increase the APR
• Model form is provided for this use
         Delivery and Timing of
• Closed-end Credit
  – Before consummation, but not earlier than the decision to
    approve is communicated to the consumer
• Open-end Credit
  – Before the first transaction is made under the plan, but not
    earlier than the decision to approve is communicated to
    the consumer
• Account Review
  – When the decision to raise the APR is communicated to
    the consumer, or not later than 5 days after the effective
    date of the APR increase
        Delivery and Timing of
• May be provided verbally, electronically or
  in writing
  – Caution, it will be difficult to prove a verbal
    delivery of the notice
• Co-borrowers
  – Same address: May send one notice
  – Different addresses: Must send a notice to each
    co-borrower at different addresses
          Credit Score Disclosure
          Exception Notices
• In lieu of a Risk-Based Pricing Notice
• Exception Notice must be sent to all consumers
• Creditor does not have to determine who to send a
  notice to
   – Direct Comparison, Credit Score Proxy and Tiered Pricing
     methods are not used
• Specific formats are required, see materials
• Model forms are considered a safe harbor
        Credit Score Disclosure
        Exception Notices
• Three types of Notices
  – Residential Mortgage Credit Score Disclosure
    Exception Notice
  – General Credit Score Disclosure Exception Notice
  – No Score Available Exception Notice
        Residential Mortgage Credit
        Score Disclosure Exception Notice
• Used only for credit secured by 1-4
  residential real property
• Provides disclosure of credit score and key
  factors in determining the score
• Provides score range
• Incorporates content of existing Notice to
  the Home Loan Applicant
         General Credit Score
         Disclosure Exception Notice
• May be used for credit that is not secured by 1-4
  residential real property
• May not be used for Account Review
• Provides disclosure of credit score but not key
  factors in determining the score
• Provides score range
• Does not incorporate Notice to the Home Loan
  Applicant content
          Which score should be
          disclosed in the Notice?
• A credit score that was used in connection with the
  credit decision
• If multiple scores are used, disclose the score
  actually used
   – Middle score
   – Average score
   – Other process/score creditor uses
• If no score is used, creditor can provide a credit
  score it obtains from a credit reporting agency
       No Score Available
       Exception Notice
• If you regularly provide the Credit Score
  Disclosure Exception Notices, and
• If consumer does not have a credit score,
• You must provide a notice with special
  content explaining the importance of credit
        Exception Notices –
        Special Rules
• Must be in writing, in a form the consumer
  can keep
• Notice must be segregated from all other
  information provided to the consumer
• Co-borrowers
  – Must send a separate notice to each co-
    borrower, even if they live in the same house.
  – Notices may not be sent in the same envelope
      Choose a Compliance
• Risk-Based Pricing            • Credit Score Disclosure
  Notice                          Exception Notice
   – Provide to a specific         – Provide to all consumers
     segment of consumers            who apply for credit
     who apply for credit          – Requires disclosing the
   – Potentially complex             consumer‟s credit score
     process to determine            and calculating its
     which consumers to send         corresponding score
     a notice to                     distribution
   – Standard form letter, no      – Standard form letter, with
     external data input             credit score and score
                                     distribution input
          Enforcement and
• Enforcement
   – For banks and credit unions, their primary regulator
   – For all others, the Federal Trade Commission
• Administrative Penalties
   – Injunctive relief
   – $3,500 for each knowing violation
      • A company can not be held liable if it can show by a
        preponderance of evidence that it maintains reasonable
        procedures to assure compliance
       For More Information
• Final Rule
• Forms
  – See materials
 MDIA Changes to TILA

Mortgage Disclosure Improvement Act
– Applies to – consumer loans secured by
– Doesn‟t matter who lives there
– Applies to - 2nd homes & vacation homes.
– Effective July 30, 2009 - on loans for which
  an application is received on or after July
  30, 2009
        MDIA (cont.)
• Definitions
  – Consummation – when the borrower becomes
    contractually obligated on the loan – In
    California, that means when the borrowers sign
    note and deed of trust.
  – Business Day –
     • Precise – same definition as for the 3-day right to cancel
       – Mon-Sat, no Sundays or Federal holidays.
     • General – days that creditor is normally open for
        MDIA (cont.)
• Initial Disclosures in 3 days - Must send initial
  TILA disclosures no later than 3 business days
  (general definition) after creditor receives
  the written application.
• The initial TILA disclosure - must be given at
  least 7 business days (precise definition)
  before consummation. Days are counted
  from the date the disclosures are sent.
       MDIA (cont.)
• Waiver of the 7 day waiting period:
  – Needs to be a bona fide personal
    financial emergency (same as when
    waiving the 3 day right of rescission)
  – Must be in writing, signed by the
    borrowers who are primarily liable on the
  – Can‟t be a printed waiver form.
        MDIA (cont.)
• Corrections/Redisclosure
  – If the APR changes more than 1/12% after the
    initial disclosure – borrower needs to receive the
    corrected disclosures no later than 3 business
    days (precise definition) before consummation.
  – Disclosures that are mailed are deemed
    received 3 business days (precise definition) after
    they are put in the mail.
      MDIA (cont.)
• Borrower must receive the disclosures
  prior to paying any fee related to the
  loan except that a bona fide fee for
  the credit report may be charged prior
  to the borrower receiving the
        MDIA (cont.)
• Notices
  – The following notice must be put on the initial
    TILA disclosure, and on any corrected disclosures
    – “You are not required to complete this
    agreement merely because you have received
    these disclosures or signed a loan application.”
  – The following label must be on the payment
    schedule for ARM loans: “Payment Schedule:
    Payments will vary based on interest rate
      MDIA and E-Sign Act
• Any disclosures sent via email must be
  sent in compliance with the E-Sign Act
  – Need borrower‟s acceptance of e-
    communications via a specific E-Sign
    disclosure notice prior to delivery
  – This disclosure must be sent via email
      Links to Applicable Law
• 12 CFR 226.2
• 12 CFR 226.17
• 12 CFR 226.19
• 15 USC 701
       Section 35 of the
Truth-in-Lending Regulations
    Higher Priced Mortgage
       What is a higher priced
       mortgage loan (HPML)?:
• A consumer loan secured by the
  borrower‟s principal dwelling in which
  the loan‟s APR exceeds the “average
  prime offer rate” for a comparable
  transaction as of the date the interest
  rate is set by 1.5% or more for 1st Trust
  Deeds (“TD‟s) and 3.5% or more on a
  junior TD.
         Average Prime Offer
• Average prime offer rate – The Federal Reserve
  Board will publish this rate at least weekly. It is an
  APR derived from average interest rates, points &
  other loan pricing terms currently offered to
  consumers by a representative sample of creditor
  for mortgage transactions that have low-risk pricing
• Link to APOR:
• Construction loan – for initial construction of a
• bridge loans (loans with a term for 12 months or less
  to purchase a new owner occupied dwelling where
  the borrower plans to sell their current dwelling
  within 12 months),
• reverse mortgages and
• Home Equity Lines of Credit (“HELOC‟s”)
      Rules For Higher-Priced
      Mortgage Loans
• Repayment ability – can‟t make a
  HPML without regard to a consumer‟s
  repayment ability as of consummation,
  as provided in §34 of the regulations.
         Rules for Higher-Priced
         Mortgage Loans (cont.)
• Prepayment penalties – can‟t have a
  prepay penalty on a HPM unless:
  – Under the terms of the loan: The penalty will not apply
    after 2 years following consummation.
  – No penalty if the source of the prepayment funds is a
    refinancing by the creditor or an affiliate.
  – The payments (of principal and/or interest) don‟t change
    during the first 4 years of the loan.
• Violation of the prepay penalty restrictions
  creates a right of rescission. (12 CFR 226.23).
       Rules For Higher-Priced
       Mortgage Loans (cont.)
• Escrow for taxes & insurance (first
  mortgages only)
• Evasion – Can‟t structure the loan as a
  HELOC to evade the requirements of
  this section.
       Income Verification
• Violation of Reg. Z to extend credit to a
  consumer based on the value of the
  consumer‟s collateral without regard to the
  consumer‟s ability to repay as of
  consummation, including the consumer‟s
  current and reasonably expected income,
  employment, assets other than the
  collateral, current obligations, and
  mortgage-related obligations.
       Income Verification (cont.)
• Mortgage-related obligations -
  include property taxes, mortgage-
  related insurance, and similar
  expenses. Similar expenses include
  Home Owner‟s Association (“HOA”) &
  condo assoc. fees. (per Official Staff
       Income Verification (cont.)
• Verification of ability to repay-creditor
  must verify a consumer‟s repayment
  ability as follows:
  – Verify amounts of income or assets that is
    relied upon to determine repayment
    ability, including expected income or
       Income Verification (cont.)
• Ways to verify income:
  – By the consumer‟s W-2‟s
  – Tax returns
  – Payroll receipts
  – Financial institutions records
  – Other third party documents that provide
    reasonably reliable evidence of the
    consumer‟s income or assets.
     Income Verification (cont.)
– Includes written or email letter from
  consumer‟s employer verifying
  consumer‟s income (Official Staff
– Includes receipts from a check-cashing or
  remittance service. (Id.)
– This does not include information provided
        Income Verification (cont.)
• Credit must verify the consumer‟s current
  – A credit report may be used to verify current
    obligations. (Official Staff Commentary)
  – But the creditor must consider obligations
    disclosed on a loan application that do not
    appear on the credit report, but are not required
    to independently verify the obligation.
         Income Verification (cont.)
• Safe Harbor – Presumption of compliance if
  – Verifies consumer‟s repayment ability as specified in the
    regulation; and
  – Determines the consumer‟s repayment ability using the
    largest payment of principal and interest scheduled in the
    first 7 years following consummation and taking into
    account current obligations and mortgage-related
    obligations; and
  – Assesses consumer‟s repayment ability taking into account
    at least one of the following:
     • The ratio of total DTI, or
     • The income the consumer will have after paying debt
       Income Verification (cont.)
• Exclusions from presumption of
  – Neg-am loans
  – Interest-only loans where the term is less
    than 7 years
    • Exemption: Bridge loans with terms of 12
      months or less.
        Links to Applicable Law
• Section 34: 12 CFR 226.34
• Section 35: 12 CFR 226.35
• Section 23 (Right of rescission): 12 CFR 226.23
• Official Staff Commentary to Regulation Z
California Higher Cost Mortgage Law
      Increased Fiduciary Duties
               A.B. 260
        Fin. Code 4995 et seq.
       Additions to licensing
• Real Estate Brokers: It is now a
  licensing violation to fail to comply
  with Chapter 2 of the Civil Code,
  relating to mortgages.
• This includes the foreclosure laws, the
  Foreclosure Consultant laws, the Home
  Equity Sales Contract Act, among
        Additions to licensing
• For CFL‟s, RML‟s, Credit
  Unions, and CA Banks –
  violations of Federal
  lending laws (Real Estate
  Settlement Procedures
  Act, Truth in Lending Act,
  etc.) is a licensing
        Additional license violations –
        what it means for you
• If you are licensed under a regulator other
  than the Department of Real Estate – failing
  to give a Truth-in-Lending disclosure within in
  the proper time-frame, or failing to follow
  the new rules for the Good Faith estimate
  could subject you to DOC sanctions.
         Additional license violations –
         what it means for you
• For DRE licensees – now
  you can be subject to
  DRE sanctions for failing
  to follow the Foreclosure
  Consultant law, or by
  failing to attempt to
  contact the borrower
  prior to foreclosing a
  loan covered under S.B.
       Increased Fiduciary Duties
• Covers Real Estate Brokers, California
  Finance Lenders, Residential Mortgage
  Lenders, state commercial or industrial
  banks, state savings associations, and
  state credit unions – who are defined
  as “licensed persons”.
      Increased Fiduciary
• A mortgage broker is defined as “a
  person who provides mortgage
  brokerage services”
• A licensed person is considered a
  mortgage broker only with respect to
  transactions in which the person
  provides mortgage brokerage
       Increased Fiduciary Duties

• Mortgage brokerage services” means
  – Arranging or attempting to arrange,
  – As exclusive agent for the borrower or
  – As dual agent for the borrower and
  – For compensation or in expectation of
    compensation, (cont.)
       Mortgage Brokerage Services

• Paid directly or
• A residential mortgage
• Made by an
  unaffiliated third party.

      Increased Fiduciary
      Duties (cont.)
• Residential
  mortgage loans
  – consumer loans
  secured by single
  family 1-4 unit

       Increased Fiduciary Duties

• A mortgage broker (as defined) is a
  fiduciary of the borrower regardless of
  whether the broker is acting as an
  agent for any other party in the
• A breach of the fiduciary duty is a
  license violation.
       Increased Fiduciary
       Duties (cont.)
• The fiduciary duty includes a requirement
  that the mortgage broker place the
  economic interest of the borrower ahead of
  his or her own economic interest.

      Increased Fiduciary Duties-
      what it means for you
• Non- DRE licensees– you now have a
  fiduciary duty to the borrower
  whenever you broker a consumer loan
  secured by a SFR 1-4 property that is
  funded by an unaffiliated third party.
       Increased Fiduciary Duties-
       what it means for you
• What is a fiduciary duty?
  – The highest standard of good faith.
  – Duty of loyalty.
  – Duty to exercise skill, care & diligence.
  – Duty to disclose pertinent information.
  – Duty to obey instructions of the borrower.
        Increased Fiduciary Duties-
        what it means for you
• DRE licensees – you already have a fiduciary
  duty to the borrower on all loans.
• The legislature has clarified that our fiduciary
  duty includes the duty to put the economic
  interests of the borrower ahead of our own
  economic interests.
• That means giving the borrower the best
  loan for them, even if you make less money
  on the best loan for the borrowers.
        Higher Priced Mortgage law:
        What loans are affected

• Loans that are a “higher priced mortgage
  loan” (HPML) as defined under the Truth in
  Lending (TIL) regulations.
• Not to be confused with “high priced
  mortgage loans” which are regulated under
  section 32 of the TIL regulations.
• Effective for loans originated on or after July
  1, 2010
        What is a Higher Priced Mortgage
• “A consumer credit transaction secured by
  the consumer's principal dwelling with an
  annual percentage rate that exceeds the
  average prime offer rate for a comparable
  transaction as of the date the interest rate is
  set by 1.5 or more percentage points for
  loans secured by a first lien on a dwelling, or
  by 3.5 or more percentage points for loans
  secured by a subordinate lien on a
        What is a Higher Priced
        Mortgage Loan? (cont.)
•   Consumer loan
•   Owner-occupied
•   SFR 1-4
•   High Annual Percentage Rate (APR) –
    today (July, 2010), any first mortgage
    with an APR over 6.14% and a second
    mortgage with an APR over 8.14%.
       What loans are not
• Business purpose loans are not covered
• 5 or more unit properties are not covered
• Commercial properties are not covered

        Prepayment Penalty
        Restrictions on HPML‟s
• The lender can only
  charge a 2 year pre-
  pay penalty.
• The lender is limited as
  to the amount of
  prepayment penalty
  they can charge.

      Prepayment Penalty
      Restrictions (cont.)
• The prepayment penalty shall not
  exceed 2% of the principal balance
  prepaid during the first 12 months
  following loan consummation, or 1% of
  the principal balance prepaid during
  the second 12 months following loan
       Higher Priced Mortgage
• Some of the rules apply to all licensed
• Some of the rules apply only to
  mortgage brokers as defined. i.e.
  licensed persons who make HPML‟s
  funded by unaffiliated third parties.
      HPMLs – Rules applicable
      to all licensed persons
• Shall not make or cause to be made
  any false, deceptive, or misleading
  statement in connection with an
• Shall not recommend or encourage
  default on an existing loan when
  arranging a HPML to refinance the
  existing loan.
       HPMLs – Rules applicable to
       all licensed persons (cont.)
• Shall not make a HPML with a negative
  amortization feature.
• All of the provisions will apply to any
  licensed person who in bad faith
  attempts to avoid the application of
  the law by dividing the loan
  transaction into separate parts, or by
  any other subterfuge.
         HPMLs – rules applicable
         to “mortgage brokers”
• A mortgage broker who only arranges HPML‟s shall
  disclose that fact orally & in writing to the borrower
  at the time of initially engaging in mortgage
  brokerage services with the borrower.
• Anti-steering provision
• No extra compensation for loans with prepayment
• Same compensation to the broker no matter who
  pays, borrower or lender.
       HPMLs – rules applicable to
       “mortgage brokers”
• How do you document that your
  borrower did not qualify for a loan with
  a lower cost in compliance with the
  anti-steering provision?
• How do you document that you orally
  disclosed to the borrower that you only
  arrange HPML‟s, if applicable?
       HPML Rules – Safe
• If a licensed person
  in good faith fails
  to comply with the
  HPML Rules, they
  shall not be liable if
  they can follow
  either of 2 safe

       HPML Rules – Safe
       Harbor No.1
• Within 90 days of the loan closing and
  before any action against the licensed
  person under the HPML law, the
  licensed person did all of the following:
  – 1.) Notified the borrower of the non-
    compliance, and
  – 2.) Tendered appropriate restitution, and
      HPML - Safe Harbor No. 1

• 3.) Offered, at the borrowers option,
  either to make the HPML comply with
  the law, or change the terms of the
  loan so it is no longer an HPML, and
• 4.) Took appropriate action based on
  the borrower‟s choice within a
  reasonable time.
       HPML Law - Safe Harbor
• The compliance failure was not
  intentional and resulted from a bona
  fide error despite procedures adopted
  to avoid errors, and within 120 days of
  receipt of complaint or discovery of
  the error, the licensed person does all
  of the same items as in Safe Harbor
  No. 1 above.
• Additions to the possible license violations.
• Fiduciary duty extended to CFL‟s, RML‟s,
  state commercial or industrial banks, credit
  unions and savings associations under
  certain circumstances.
• Rules on higher priced mortgage loans.
• This law will further reduce competition in
  the industry, providing opportunity for the
  smart operator.
      Links to Applicable Law
• A.B. 260:
Simpler and easier
       Biggest Surprises
• Lenders shocked the industry with their
  ability to misinterpret

• Industry rates and fees rose instead of

• “Changed Circumstances” abound
       One more surprise

• HUD issued a proposed proposed

• Affiliated businesses in the spotlight
       Gentle Reminders
• Once the six items have been received, a
  good faith estimate MUST be issued
• Changed circumstances still demand a new
  GFE within 3 business days
• The lender does not need to send a GFE if
  the broker already did
• Just because you don‟t have the six items
  does not mean you don‟t still need to
  comply with the other federal laws!
Changes in Foreclosure
                 S.B. 1137
 California Foreclosure Protection Act
Municipal Distressed Property Ordinances
        Tenant Protection Laws
     Civil Code s. 2923.5 – Contact
     with borrower prior to NOD –
– Effective 9/6/08
– Applies to: only applies to loans recorded
  between 1/1/03-12/31/07 secured by o/o 1-4 unit
  residential real property.
      – Owner Occupied – means owner-occupied as
        indicated to the lender in the loan documents.
– Beneficiary or Authorized Agent can‟t file NOD
  until 30 days after either complying with initial
  contact rules or satisfying due diligence when
  unable to contact borrower.
       Contact with Borrower
       in Default
• Initial contact: Beneficiary or
  Authorized Agent shall contact
  borrower by phone to assess financial
  condition and explore options to avoid
  foreclosure. During the initial contact
  the Beneficiary or Authorized Agent
  shall do the following:
         Initial contact with
• Right to request subsequent meeting: Beneficiary or
  Authorized Agent shall advise borrower that he or
  she has the right to request a subsequent meeting
• If the subsequent meeting is requested, Beneficiary
  or Authorized Agent shall schedule the meeting to
  occur within 14 days.
• The assessment of the borrower‟s financial condition
  and options to avoid foreclosure can be at the time
  of the initial contact, or at the subsequent meeting.
      Initial contact with
      borrower (cont.)
– This meeting can be telephonic.
– Toll Free HUD number - Beneficiary or Authorized
  Agent shall provide borrower with toll free
  number to HUD for HUD-certified housing
  counseling agency. 1-800-569-4287
– Contact with HUD-certified housing counselor –
  Contact with a HUD-certified housing counselor
  made at the direction of the borrower satisfies
  the requirements of the required initial contact.
           Due diligence when unable to
           contact borrower
• “due diligence”= all of the following
   – First Class Letter: Beneficiary or Authorized Agent shall first
     attempt to contact borrower by sending a first-class letter
     that includes the toll-free HUD number for a HUD-certified
     housing counseling agency.
   – Phone Call: After the letter is sent, Beneficiary or
     Authorized Agent shall attempt to contact borrower by
     phone at least 3 times at different hours and on different
     days to the primary phone number on file.
     Due diligence when unable
     to contact borrower (cont.)
– Phone Call (cont.):
  • Beneficiary or Authorized Agent can use auto
    dial if it is connected to a live person.
  • Beneficiary or Authorized Agent satisfied this
    requirement if it determines, after attempting
    phone contact, that all of the borrower‟s
    numbers on file have been disconnected.
         Due diligence when unable
         to contact borrower (cont.)
• Certified Letter: If borrower doesn‟t respond within
  14 days, Beneficiary or Authorized Agent shall send
  a letter via certified mail, return receipt requested.
• Toll Free Number: Beneficiary or Authorized Agent
  shall provide borrower with a means to contact
  Beneficiary or Authorized Agent in a timely manner,
  including a toll-free number providing access to a
  live person during business hours.
          Due diligence when unable
          to contact borrower (cont.)
• Web Site: Beneficiary or Authorized Agent shall post
  a prominent link on it‟s homepage to all of the
  following information:
   – Options available to borrower to avoid foreclosure.
   – List of financial documents borrower should collect to
     present to Beneficiary or Authorized Agent to discuss
     options for avoiding foreclosure.
   – Toll free number for borrower to call Beneficiary or
     Authorized Agent to discuss options to avoid foreclosure.
   – Toll free number to HUD-certified housing counseling
        NOD Declaration:
• The NOD shall include a declaration that
  – The Beneficiary or Authorized Agent has
    contacted the borrower, or
  – Beneficiary or Authorized Agent tried with due
    diligence to contact the borrower, or
  – The borrower has surrendered the property to the
    Beneficiary or Authorized Agent.
        NOD declaration:
• If an NOD has been filed prior to the
  effective date, the NOS shall contain a
  declaration that either:
  – Borrower was contacted to assess the borrower‟s
    financial situation and to explore options for the
    borrower to avoid foreclosure; or
  – Lists efforts made, if any, to contact the borrower
    in the event no contact was made.
         Exceptions to the
         contact requirements
• The Beneficiary doesn‟t have to attempt to
  contact the borrower if one of the following
     • Surrender of the property – The borrower has surrendered the
       property to the Beneficiary or Authorized Agent as evidenced
       by a letter confirming the surrender or delivery of the keys.
     • Foreclosure Consultant – The borrower hires a foreclosure
     • Bankruptcy – Borrower files for bankruptcy and the
       proceedings have not entered an order closing or dismissing
       the case or granting relief from a stay of foreclosure.

• Sunsets 1/1/2013
       Additional NOS notice posting and
       mailing in multiple languages-Civil
       Code s. 2924.8-

• Application – this only applies to
  residential property where the billing
  address on the note is different than
  the property address. (i.e. non o/o).
         Additional NOS notice posting and
         mailing in multiple languages-Civil
         Code s. 2924.8-
• New notice for posting and mailing: When posting
  the NOS under Civil Code s. 2924f, Trustee or
  Authorized Agent shall also post the following notice
  in the manner required for posting the NOS on the
  property to be sold, and the Beneficiary or
  Authorized Agent shall mail at the same time in an
  envelope addressed to the “Resident of property
  subject to foreclosure sale” the following notice in
  English and the Civil Code s.1632 languages:
           Additional NOS notice posting
           and mailing in multiple
           languages-Civil Code s. 2924.8-
• “Foreclosure process has begun on this property,
  which may affect your right to continue to live in this
  property. Twenty days or more after the date of this
  notice, this property may be sold at foreclosure. If
  you are renting this property, the new property
  owner may either give you a new lease or rental
  agreement or provide you with a 60-day eviction
  notice. However, other laws may prohibit an
  eviction in this circumstance or provide you with a
  longer notice before eviction. You may wish to
  contact a lawyer or your local legal aid or housing
  counseling agency to discuss any rights you may
   Sunsets 1/1/2013
           Protection to Servicers who modify
           loans - Civil Code s. 2923.6
• Effective Immediately
  Applies to: all loans
• A Servicer acts in the best interest of all parties if it
  agrees to or implements a loan modification
  (“mod.”) or workout for which both of the following
   – Loan is in payment default or payment default is
     reasonably foreseeable; and
   – Anticipated recovery under the mod. or workout exceeds
     anticipated recovery through foreclosure on a Net Present
     Value (“NPV”) basis
   – Sunsets 1/1/2013
         Section 5 – 2929.3-Fine for failing
         to maintain foreclosed property

• Applies to: vacant residential property (not just 1-4)
• Legal owner shall maintain vacant residential
  property purchased or acquired at a foreclosure
• $1000 per day = maximum fine allowed
• Fine commences on the day following the
  expiration of the period to remedy the violation.
      Failing to maintain foreclosed
      property (cont.)
– Governmental entity may not impose fines under
  this section and a local ordinance.
– Governmental entity shall give a notice of intent
  to assess fine if action to correct not started
  within 14 days and completed within 30 days.
– Notice mailed to address on deed
– Governmental entity can give less than 30 days
  notice to remedy if the condition threatens
  public health & safety provided that notice &
  time to comply is given.
           Failing to maintain foreclosed
           property (cont.)
•    Failure to maintain:
    – Failure to care for the exterior of the property
    – Permitting excessive foliage growth that diminishes the
       value of surrounding properties.
    – Failing to take action to prevent trespassers or squatters
       from remaining on the property.
    – Failing to take action to prevent mosquito larvae from
       growing in standing water.
    – Other conditions that create a public nuisance.
•    Application – only applies to residential real property
•    Cumulative – the rights & remedies under this section are
•    Sunsets 1/1/2013
        60 days eviction notice to tenants
        after foreclosure- Civil Code
• Applies to: tenant in possession of rental housing
• Tenant in possession of rental housing at the time of
  foreclosure sale shall be given 60 days written
  notice to quit before they can be evicted.
• Doesn‟t apply to any party to the note that remains
  on the property.
• Sunsets 1/1/2013
• Pr-empted by Federal statute.
         Links to Applicable Law:
• Ca Civil Code s. 2923.5:
• Ca Civil Code s. 2924.8:
• Ca Civil Code s. 2923.6:
• Ca Civil Code s. 2929.3:
• CA Code of Civil Procedure s. 1161b:
California Foreclosure
   Prevention Act

a.k.a. The Foreclosure
 Postponement Act
         What loans are covered?
         (Eligibility) DRE Regs §2850.2 –

•   Residential mortgage loans – consumer loans
    secured by a dwelling
•   Servicers without a qualified CLMP must wait an
    additional 90 day prior to filing the Notice of Sale
    for covered loans.
•   Servicers with a qualified comprehensive loan
    modification program (CLMP) are exempt from
    adding the additional 90 days to the foreclosure
        What is a Qualified Comprehensive
        Loan Modification Program (CLMP)?

• The criteria are listed in the DRE regulations s.
  2850.2-2850.6 and include:
  – NPV test to determine whether a modification is
  – Ability to repay and minimum front end ratios;
  – Long term sustainability guidelines;
  – Other features that may include interest rate
    reduction for 5 years & extension of amortization.
         Application to your
• The DRE or DOC can accept or reject your CLMP.
• If they accept it, you don‟t have to wait the extra
  90 days before filing the notice of sale on covered
• If they accept your plan, you have to submit
  quarterly modification reports to the DRE.
• The DRE has accepted about 13 CLMPs, and the
  DOC has accepted 64 CLMPs.
     California Foreclosure Prevention
     Act - Link to the laws

• DRE regulations Art. 16.5:
Municipal Distressed
Property Ordinances
  Distressed, indeed.
       Municipal Distressed
       Property Ordinances
• Some municipalities (i.e. cities or
  counties) have passed these
• Each ordinance is different, although
  some are similar.
• Most affect only residential property,
  although they don‟t all define
  residential property in the same way.
         Common Requirements of
         Distressed Property
• Registration of the property and payment of fee
  to municipality;
   – Many require annual registration
   – The fees are typically below $200 per property.
• Secure and Maintain the property
• Regular inspection of the property
• Posting of owner‟s name & contact information.
• Retention of a local property manager if the
  owner is not local.
       Bottom Line
• Before you file the Notice of Default,
  check to see if the property is covered
  by a municipal distressed property
• If the property is covered, read and
  understand the law, and comply with
       Don‟t forget
• Remember: Even though a municipality
  doesn‟t have a distressed property law
  aimed at REO‟s, they all have property
  maintenance laws which require
  property owners to maintain their
  property, and allow abatement and/or
  fines if the property is not maintained.
• List of known ordinances in materials.
Tenant Protection laws
       Federal Law: Protecting
       Tenants at Foreclosure Act
       of 2009 (PTFA)
• Applies to:
  – Foreclosures on:
    • Federally-related loans (i.e. loan secured by
      an SFR1-4 and made by a creditor who makes
      or invests in $1mil or more loans per year; or
    • Loans on any dwelling or residential real
      property, which is defined as an SFR1-4.
• Sunsets 12/31/2012
        PTFA (cont.)
• The law requires:
  – Bona fide tenants must receive a 90 day notice
    to quit; and
  – Bona fide tenants who entered into a lease
    before the notice of foreclosure was given may
    remain on the premises until the end of the
    remaining lease term, except:
     • A successor in interest may terminate a lease effective
       on the date of sale of the unit to a purchaser who will
       occupy the unit as their primary residence, subject to
       the receipt by the tenant of the 90 days notice to quit.
        PTFA (cont.)
• What is a Bona Fide Tenant?
  – Tenant cannot be the former
    mortgagor/trustor or child, spouse, or
    parent of the mortgagor/trustor;
  – The lease or tenancy must have been the
    result of an “arms-length” transaction; and
  – The rent under the lease cannot be
    “substantially less than fair market rent for
    the property” or the unit‟s rent is reduced or
    subsidized due to a…subsidy.”
       State law
• Civil Code 1946.1 – 60 day notice to quit
  on all evictions on residential real
• Note – the PTFA supersedes State law on
  those situation covered by the Federal
• The PTFA only covers residential property
  that is sold at a foreclosure sale. The
  State law covers all other residential real
       State law (cont.)
• CCP 1161b: Must give 60 day written
  notice to quit on rental “rental housing
  unit” where the tenant was in
  possession at the time the property is
  sold in foreclosure.
• The PTFA supersedes 1161b.
• 1161b sunsets 1/1/2013 (before the
         Municipal Law
• Some cities have enacted their own ordinances
  regarding evictions of tenants after foreclosure:
   – City of Richmond (Mun. Code Chapter 7.105 )
   – City of Los Angeles (Mun. Code Chapter IV, art.
      14.1, 49.90 et seq.)
   – There may be others.
• The ordinances are each different, and list
  permissible reasons for eviction, require relocation
  fees in some circumstances, and require specific
  notices be given to the tenants at specified times
  in the process.
          Links to applicable law
CA Civil Code s.1946.1:
CA Code of Civil Procedure 1161b:
City of La Mun. Code Ch.IV, art. 14.1:
City of Richmond Municipal Code Mun. Code Chapter 7.105:
  “Red Flag” Rules
Identity Theft Prevention
      What are the Red Flag
• Part of the Fair Credit Reporting Act
• Rules for the development,
  implementation, and administration of
  a program designed to prevent
  identity theft.
       Who is covered by
       the Red Flag Rules?
• Basically anyone who regularly
  extends credit (i.e. a creditor) primarily
  for personal, family, or household
  purposes (i.e. consumer loans) that
  permits multiple payments, such as a
  mortgage loan.
       How does a creditor comply
       with the Red Flag Rules?
• Periodic Identification of covered
  – Determine if you have any accounts
    covered by the rules.
  – A covered loan is a consumer loan that
    permits multiple payments, such as a
    mortgage loan.
     Conduct a risk assessment
     taking into consideration:
– Methods the creditor provides to open an
– Methods the creditor provides to access
  accounts, and
– Creditor‟s previous experience with
  identity theft.
      Develop a written
• Identify relevant Red Flags &
  incorporate into the program.
• Develop a way to detect Red Flags.
• Develop responses to Red Flags.
• Ensure that the program is updated
       Administration of the
• Obtain approval of the program from the
  board of directors or other corporate
  governing entity, president, etc.
• Designate an employee at the senior
  management level for oversight,
  development, implementation &
  administration of the program.
• Train staff.
• Ensure compliance of service providers.
      Effective Date
• Rules are set to go into effect
• The effective date has been delayed
  several times since the original
  effective date of 11/2008.
      Links to applicable law
• Red Flag Rules, 16 CFR part 681:
• Federal Trade Commission information
  on the Red Flags Rule:
S.B. 385 and the DRE and
     DOC Regulations
     What laws are involved?
• S.B. 385
• New DRE regs - 2840,2842 & 2844
• New DOC regs-10 CCR 1436, 10
  for CFLs and 10 CCR 1950.314.8
  for RMLs.
• The Guidance and the Statement
        SB385-Real Estate Brokers
• The new MLD forms – Applies to every REB
  who is required to give an MLD, who makes
  a “non-traditional loan”, i.e. a loan that
  defers payments of principal or interest – has
  to give the new 885 MLD form.
• Applies to all residential properties
• 2844 Qualification Standards - applies to a
  “real estate broker acting within in the
  meaning of B&P § 10131.1 on
        SB385-CFL‟s & RML‟s
• “Every mortgage lender, mortgage broker, and
  mortgage lender and broker”- CFLs (§1436)
• “Every licensee” –RMLs (§ 1950.314.8)
• The regs apply to “Non-traditional mortgage
  products and adjustable rate mortgage products
  as defined and prescribed by the Guidance”. By
  Guidance, they refer to both the Statement and
  the Guidance.
• CFL‟s- Does not apply to commercial loans. Only to
  SFR 1-4. (1436(f))
• RML‟s – only applies to residential 1-4.
      What Actions/Policies are mandated
      for CFL‟s, RML‟s and non-10131.1 Real
      Estate Brokers?
• Borrower‟s Ability to Repay (even on
  non-owner occupied investment
• Identifiable Benefit to borrower
• Refrain from repeated Refinances
       What actions/policies are mandated
       for covered entities & loans?
• Full disclosure
• Avoid combining non-traditional loan features
• Accept stated income or reduced doc only with
  mitigating factors
• Simultaneous 2nd lien loans-only with mitigating
• Considerations when setting an introductory rate
          What actions/policies are
          mandated for covered entities &
•   No predatory loan terms to subprime borrowers
•   Avoid YSPs
•   Monitor 3rd party originations
•   Advertising guidelines
•   Monthly statement provisions and no steering
    borrowers into neg-am payments for Payment
    Option ARMS
      What actions/policies are
      mandated for covered entities &
• Written Compliance Report (for CFLs)
• Document and records maintenance
  (for CFLs)
• Workout arrangements (for CFLs)
      Policy Decisions
• Consider becoming a threshold broker
  if you are not already (so that the
  requirements of 2844 don‟t apply)
• Consider refraining from making ARM,
  Neg-Am, or Interest-only loans.
  (Partially amortized may be ok.)
  The Federal
“Do Not Call” List
       December 18, 2002:
       The Action Heard Round The World
• FTC passed the “Do-not-call Implementation
  Act,” which announced the adoption of a
  national “Do-Not-Call” list
• List is maintained federally
• Telemarketers have to pay for it
• List will be free for consumers
• Caller ID to be required
       Basic Principles of the
• Consumers call (888) 382-1222 or go
  on-line to to
• One call to a person on the list can
  cost a telemarketer $16,000.00
• An individual can get an easy $500-
        Established Business
• One small hole has been left open for
  realtors and loan originators
• Proof of a prior business relationship with a
  customer allows you to call them
• Prior clients are those who have inquired
  with you or applied for a loan in the last 90
  days or for whom you have serviced or
  funded a loan within the the last 18 months
• The law applies to investors as well
       Company Specific Lists
• Each company must still maintain their
  own company-specific do-not-call list.
• A past client, even though they meet
  the requirements, may still report you if
  they have asked you to remove them
  from your list
• That is $16,000 to Sam if you violate
       Prior Express Permission
• Prior permission allows you to exceed
  the 18-month requirement
• Authorization form must have the
  customer‟s name, phone number, and
• Permission is void if the client later asks
  to be added to your do-not-call list
       The Safe Harbor
• If a seller or telemarketer can establish
  that as part of its routine business
  practice, it meets the following
  requirements, it will not be subject to
  civil penalties or sanctions for
  erroneously calling a consumer who
  has asked not to be called, or for
  calling a number on the National
      Safe Harbor Rules
• Create written Procedures
• Train your personnel
• Maintain your own entity-specific Do
  Not Call list.
• Document a process for staying up to
  date on the list
• Monitor and enforce internal
       Major “Safe Harbor”
• The call must be an error!
         2009 Numbers
•   Total numbers in 2009 – 191,453,311
•   Complaints in 2009 – 1,804,982
•   California numbers in 2009 - 21,894,204
•   California complaints in 2009 - 244,572
•   Most #‟s and complaints in CA - (310)
      Helpful Links
• Federal:
• FCC Regs:
Gramm Leach Bliley
      Gramm Leach Bliley
• Gentle reminders
        FTC Exact Requirements
• Designate one or more employees to
  coordinate the safeguards
• Identify and assess the risks to customer
  information in each relevant area of the
  company's operation, and evaluate the
  effectiveness of the current safeguards for
  controlling these risks
         FTC Exact Requirements
• Design and implement a safeguards program, and
  regularly monitor and test it
• Select appropriate service providers and contract
  with them to implement safeguards
• Evaluate and adjust the program in light of relevant
  circumstances, including changes in the firm's
  business arrangements or operations, or the results
  of testing and monitoring of safeguards


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